Companies don't have to be in the field to nudge people to return money they owe lenders.
Rishab Goel, co-founder of the digital-debt collections firm Credgenics, says lenders refer to it every month $5 billion spread over 11 million accounts for recovery: Up from $3.5 billion across 6 million in 2022.
"They have realised the potential of digital enablement and data-driven insights to enhance the efficacy of collections."
The old boots-on-the-field approach to collections is passe and a new way is being chased by capital.
The grapevine has it that Credgenics is in the process of a top-up, double the $25 million it raised in 2021 in a series-A funding led by Westbridge Capital, Tanglin Venture Partners, and Accel Partners.
Take FREED
The firm supports borrowers, both as credit and legal counsellors.
Over 15,000 consumers have signed up on its platform (the monthly run-rate is around 1,500) and a tad over Rs 800 crore (Rs 8 billion) is up for resolution.
It has teamed up with the escrow-as-a-service provider, Castler (backed by Zerodha's venture capital arm Rainmatter, Venture Catalysts, 9Unicorns, Faad Network, and LetsVenture).
Ritesh Srivastava, FREED's founder-CEO, is candid enough to let you know that his business rides on "the exponential growth in unsecured credit (is) a matter of concern."
He looks at credit-card outstanding, which crossed Rs 2 trillion in April, differently: if at all a milestone, then it is one for worry. Why so? "This (Rs 2 trillion) is inclusive of the amounts revolved and has to be closely watched."
For as the balance amounts balloon, near-usurious charges come into play.
And you are left high and dry, more so if you are new-to-credit, or a millennial with poor credit discipline.
It is why FREED (and this has been learned on good authority) has made a case for a body on the lines of The American Fair Credit Council -- it advocates consumer rights for those with unmanageable unsecured debt -- to Mint Road.
For nearly a decade, retail has been in fashion given the stress in corporate lending.
Most of the top-line banks have an almost 50:50 split between retail and corporate loans on their books (a few did have a tilt in excess of 50 toward retail, but that has been taken care of by better corporate loan pick-up recently).
That said, retail credit has never been seriously tested for a down-cycle: a point highlighted by Moody's Ratings as far back as 2003.
Emerging ecosytem
What we are now seeing is an ecosystem emerging around it: digital debt collectors, counsel givers, scorekeepers, and technology vendors.
In particular, unsecured credit, be it from banks or non-banking financial companies.
'The Report on Trend and Progress of Banking in India' (T&P: 2021-22) observed that in recent years banks appear to have displayed 'herding behavior"' -- in diverting lending away from the industrial sector towards retail loans.
And 'empirical evidence suggests that a buildup of concentration in retail loans may become a source of systemic risk.'
It explained 'systemic as a herd' as follows: When institutions that are not individually systemically important, behave in a way similar to market leaders and get exposed to common risks.
This could amplify systemic risk through higher co-movement of performance of banks -- even though individually they may focus on reducing their standalone risk through portfolio diversification.
The T&P also noted that unsecured lending presents a higher credit risk for banks, attracting greater provisions and risk weights.
The share of unsecured credit in total credit has been on the rise since 2015, largely due to the higher interest earnings of banks from such loans.
According to TransUnion CIBIL's 'Credit Market Indicator' -- which captures changes in credit health -- touched 102 in Q1FY23, up from 94 in the same period in 2022.
But, it too, called attention to unsecured consumption-led products that grew at a compounded annual growth rate (CAGR) of 47 per cent from the quarter ending March 2021 to March 2023.
"Responsible lending, continuous portfolio monitoring and controlling concentration risk will be essential for sustaining the growth momentum," says Rajesh Kumar, managing director and CEO, TransUnion CIBIL.
Money saved
Digital collections help cut down the huge costs lenders incur when they send recovery agents to check on customers.
A single field visit costs anywhere between Rs 250 and Rs 500; and there's no surety this will lead to a settlement even after a few tries.
Worse still, the incentives on offer by lenders to agencies engaged in recoveries are linked to their strike rate: The recoveries made.
It also puts lenders within a hairbreadth of running afoul of the Reserve Bank of India's norms to prevent customers' harassment; and by extension, the legal fallouts and reputational risks which follow given the huge investments in financial brands.
"It would be wrong to look at this business merely from a stress account aspect. It leads to better customer management as it's less intrusive," says Anshuman Panwar, co-founder of Creditas Solutions.
Nitin Purswani, co-founder and CEO of Medius AI, has it that "the biggest advantage is everything is on record, and there's little scope of miscommunication. You also get a better sense of customers' intent".
It is not that field visits are out completely, but that outreach is mainly via digital modes: E-mail, SMS, or WhatsApp.
Purswani will not call it psychological profiling, but slots folk into silos: willful defaulters, the lethargic, and those in situational stress ("having lost a job, or living with a pay cut"). With voice and chat-box, you can have predictive interactions.
"Even as it achieves whatever was sought to by human interface in the past."
Stress test
It's also not that issues in the digital world are settled.
The report of the 'Working Group on Digital Lending' chaired by Jayant Kumar Dash (RBI's executive director) noted that with no collections team on the field, some digital lenders reportedly misuse signed agreements to access mobile-phone data and contacts of borrowers to adopt strong-arm inducements to make them repay. (the use of what's known as 'skip-tracing').
The threat of real or make-believe police complaints and legal notices against borrowers has been used for recovery.
The ongoing retail buzz and the raised eyebrows on potential slippages have opened business opportunities not just at the lender-customer level, but at the institutional level, too.
BCT Digital claims to have helped banks save $1 billion from becoming dud loans (the firm was selected for the 'test phase' under RBI's regulatory sandbox for the 'Prevention and Mitigation of Financial Frauds').
Don't banks know exactly when stress is cropping up?
Jaya Vaidhyanathan, CEO of BCT Digital, is blunt when she says: "Investments in technology are happening at the on-boarding stage. Not in the middle and the back office unless there's regulatory pressure to do so."
This neatly ties in with a not-so-well-kept secret in the retail business: growth for the sake of growth; the big chase for market share, and huge pressure on sales teams.
"The very fact that you have so many firms coming up in the debt collection space or those like us tell you a story on its own," she says.
Feature Presentation: Aslam Hunani/Rediff.com
